Financing a debit call spread with a credit put spread

cvds16 said:
my personal view on this: 'are you out of your mind doing this after such an old bull market' ... I hope for you this is a theoretical exercise for your papertrading account ;-)
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LMAO no, this is for real.
And the bull market can KMA........lol. In every bear market (as an extreme case), there will always be candidates for a long trade.
 
alexpun said:
Why are you making it so complicated. If you are bullish on the stock and want to receive credit, just use a credit put spread.
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Because I don't like the risk/return ratio. This way I go from a potential <100% return to a >200% return
 
truetype said:
If the stock goes up, you make 6.70. Down, you lose 13.30. So you need to be right >⅔ of the time (ignoring, for simplicity, times when the stock is ~unch).
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Yes, but if you notice, the lower strikes are a long way down. So the probabilities are a lot lower.
 
Get back to basics. If you're bullish:
  • If IV is low, buy a call.
  • If IV is high buy a call and sell a further OTM call to partly offset the debit. (Call debit spread)
You're already saving money on a call by selling the further OTM call. When evaluating spreads you have more that one choice. You can move the spread closer/further OTM and the spread can be wider/narrower. In any case you should be evaluating the reward:risk ratio and picking the spreads with the highest reward:risk. You also need to evaluate the probabilities of the underlying landing below, in the middle, and above the spread.
 
stevegee58 said:
Get back to basics. If you're bullish:
  • If IV is low, buy a call.
  • If IV is high buy a call and sell a further OTM call to partly offset the debit. (Call debit spread)
You're already saving money on a call by selling the further OTM call. When evaluating spreads you have more that one choice. You can move the spread closer/further OTM and the spread can be wider/narrower. In any case you should be evaluating the reward:risk ratio and picking the spreads with the highest reward:risk. You also need to evaluate the probabilities of the underlying landing below, in the middle, and above the spread.
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Yep, did all that and its still expensive. THAT's the scenario I'm looking at. AFTER adjusting for you've mentioned, if the spread is still expensive, what do I do to cut the cost? I'm thinking of selling some OTM premium and that's where I'd appreciate the input.

You're explaining the very basics of a debit call spread (DCS) and buying/selling premium based on IV.

I do appreciate the advice, but I'm asking something a bit more advanced than adjusting a DCS.
:)
 
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rk4g63 said:
Yep, did all that and its still expensive. THAT's the scenario I'm looking at. AFTER adjusting for you've mentioned, if the spread is still expensive, what do I do to cut the cost? I'm thinking of selling some OTM premium and that's where I'd appreciate the input.

You're explaining the very basics of a debit call spread (DCS) and buying/selling premium based on IV.

I do appreciate the advice, but I'm asking something a bit more advanced than a DCS.
:)
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What's "expensive" mean? That you don't have enough capital to enter a $560 trade comfortable? I'd argue that if the reward:risk is favorable then it's not expensive at all.

If you want to go cheap do another trade instead of trying to get clever with a debit spread.
How about a butterfly? They're cheaper than a CDS and have a better reward:risk generally.
 
stevegee58 said:
What's "expensive" mean? That you don't have enough capital to enter a $560 trade comfortable? I'd argue that if the reward:risk is favorable then it's not expensive at all.

If you want to go cheap do another trade instead of trying to get clever with a debit spread.
How about a butterfly? They're cheaper than a CDS and have a better reward:risk generally.
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I don't think you're understanding my logic. Or perhaps I'm not explaining it well enough.
I don't care about the capital, its the potential RETURN on capital that I care about. I'm actually buying 5 contracts, BTW.
I just don't see a 5.60 buy in for a spread of 10 to be worth it. Its a 4.4 return, at most. I think we're saying the same thing here, as in, the risk/reward is not favorable. It has nothing to do with capital.

Since you're suggesting a fly, you might want to read my original post as to WHY. I'm not trying to play both sides of the trade, I'm only playing the long side.
 
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rk4g63 said:
Hi guys.
Long time lurker, first time poster. :)
I trade on OptionsXpress.

General question:
Can I finance a debit call spread with a credit put spread in the same trade?

For example, FFIV for Jan 18 expiry:
Debit call spread 160/170: Debit 5.60
Credit put spread 130/120: Credit 2.30
Net debit for the whole trade: 3.30

The whole idea of selling a 130 put is to reduce the cost of the debit call spread. Since I'm unwilling to take the risk of a naked put, I'm capping the downside by buying the 120 put. Hence, the credit put spread.

Question 1:
Is this a valid approach?

Question 2:
I can set the put spread up for earlier expiry, Oct 17 for example.
Is this still valid?

Thanks guys.
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Robert already answered your question..


generally, credit spread and debit spread have the same risk profile
you should include margin of your credit spread in your trading cost
please recheck if your trading cost reduced or not?


you can't finance an apple by buying another apple..
 
water7 said:
Robert already answered your question..


generally, credit spread and debit spread have the same risk profile
you should include margin of your credit spread in your trading cost
please recheck if your trading cost reduced or not?


you can't finance an apple by buying another apple..
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LOL agreed about the apple. This one LOOKS feasible and that's why I asked the original question - am I not seeing something you guys are?

Also, the margin doesn't seem to factor in, since I'm still at a net debit for the trade.
 
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